If 2020 was a person, it would definitely be on Santa’s naughty list. Depending on your outlook, experiences or political persuasion, we will all have our own list this Christmas of politicians, other public figures, and people that we think either deserves a visit from Santa, or a less welcomed visit from Krampus. But, truth be told, 2020 has been a challenging year for us all. In the past year we have experienced one of the most dramatic falls, then recoveries in housing market activity on record. Having covered many of the highs and lows of the property market in our recent sleigh full of property reports (see links throughout this Christmas missive to read more), it seemed an opportune time to unwrap the presents we can expect for the property market in 2021.
Year on Year % Change in Market Turnover by Month
Source: Rettie & Co. / Registers of Scotland
‘Presents’ Need to be Paid for
But while it is tempting to jump beyond this year as quickly as possible, we need to set the scene for our nativity play. One of the key characters on our stage, perhaps the (questionably) wise man bringing gold, has been the underwriting of the economy through Government intervention and the furlough scheme. The £280bn the UK Government has spent fighting Covid-19, £73bn of which was spent on job support schemes, means the UK Government’s deficit is set to hit almost £400bn by the end of the year, with total Government debt now bigger than the total economy and at levels last seen in the early 1960s. This debt burden is leading to calls for tax reforms, which may dramatically shape the housing market in coming years.
Public Sector Net Debt Excluding Public Sector Banks, UK, Financial Year 1921 to October 2020
Source: Bank of England
With wealth inequality on the rise during the pandemic according to the Institute of Fiscal Studies, there is a groundswell of demand for a wealth tax to pay for the cost of Covid-19. The Wealth Commission has put forward the most prominent of these proposals. Such proposals are far from just theoretical, having recently been passed in Argentina, but also with historic precedents in Ireland after the 2008/09 financial crisis, and in post WW2 Europe. The Wealth Commission has suggested a 1% per year tax rate imposed for five years on those with wealth of more than £1m per two-person household. This could raise £260bn. From a property perspective, such an intervention would have a clear impact on asset values and investment.
For the property market there are a number of potential issues, foremost the practical implications of asset valuation, specifically the logistics of providing accurate home valuation at scale. The challenges of discerning rateable value attest to this fact. Furthermore, there are concerns that households who are asset rich but cash poor, may struggle to meet the demands of such a tax. Farmers, small business owners and pensioners, are all groups identified as being at risk. Real estate investment by landlords is an additional sector that would come under specific pressure.
In Scotland, the Scottish Land Commission has also been advocating a new council tax band targeting the most affluent households. It has also proposed increased levies for farmers and a land value tax, which would hit private estates.
While these measures are being promoted, many commentors see them as unlikely to find support, either from a Tory UK government or in Scotland. The Scottish Government’s Finance Secretary, Kate Forbes, has stated now is not the time to increase taxes or to return to austerity. However, with the delayed Scottish budget we will have to wait to 2021 to see the Government’s response. This announcement will be important because government intervention in the housing market has real impact. Indeed, the end to the LBTT holiday in March 2021 will likely act to motivate a number of transactions early in New Year.
A Year of Change
While taxation and the fiscal outlook will be a major driver of the market, there are other key factors that will shape demand and market opportunity as we move past 2020.
The rise of suburban living and the search for additional living space enabled by remote working has been a trend in the 2020 market. Analysis we conducted in to theRural & Country Homes market showed that rural locations have experienced the strongest average price growth in Scotland, outstripping urban areas. Our branches in Bearsden and Newton Mearns have also reported an increase in demand in these prime residential suburbs. In 2021, we expect this trend to continue with buyers being more discerning about space and how they are going to live and work at home. Locations that traditionally lay beyond a comfortable commuter distance have also seen rising interest with our Melrose and Berwick-Upon-Tweed offices seeing an increase in enquiries from people looking for their slice of idyllic rural living. This is not to diminish the demand that remains in prime Edinburgh and Glasgow markets. Indeed, in the New Build market, the launch of the New Eidyn development in Edinburgh by our New Homes Team is setting new urban price benchmarks in Scotland.
It is not only the sales market in Scotland that is changing. The rental sector looks set to see some systemic changes over the next few years, building on the tenancy and taxation reforms of the past few years. The collapse in short-term lets in 2020, while likely temporary, depending on how your read Airbnb’s IPO, has pre-empted tougher future regulation and licensing, which will keep stock levels below previous peaks. Perhaps, the most significant change coming down the line in the Scottish Rental Market will be the institutionalisation of the rental sector. Build to Rent has performed exceptionally well against other use classes, such as retail and office, during the pandemic, piquing the interest of major investors and institution. Indeed, a John Lewis rental home, with their own furniture pack and Waitrose home delivery may not be too far in the future. With space requirements in city centre changing due to online retail and working from home, investment in both institutional rentals, but also residential development for sale, is well placed to absorb and convert the office and retail shaped holes left in many locations.
Ring in the New
So, after we have devoured the delivered turkey, unpacked the Amazon delivered presents and Zoomed with our extended families, thoughts and conversations often turn to the coming year. Dr John Boyle, our Director of Research & Strategy, has been producing an accurate forecast through difficult market conditions for many years and explains the likely factors shaping the coming market.
“Over the next 5 years, we expect house prices to rise by around 11%, i.e. at a similar growth rate as over the previous 5 years, which is subdued by historical standards. The main hit is likely to be in transactions. We would anticipate that they will be c.-25% down by the end of the year, with recovery unlikely next year based on current economic forecasts. Again, based on a gradual economic recovery from 2022, we would expect transactions levels to be back to 2019 trading levels by 2023. This is broadly aligned with current Bank of England forecasts.”
Rettie & Co. Scottish Price Market Forecast 2020-2024
Source: Rettie & Co.
A Closing Thought for 2020
The robust activity in the housing market in 2020, despite the unprecedented levels of uncertainty, surprised many who were predicting a dramatic slowdown in activity and a fall in values. However, what the pandemic has highlighted is the importance of our homes. Whether you are a family whose routine now includes working from home, or a young professional who is drawn to BTR for its communal working spaces and high-speed broadband, our homes have become far more than dormitories this year. It is for this reason that whether it is housebuilders seeking to secure strategic land, new investors entering the BTR sector, the Scottish Government increasing affordable house budget by £200m, or you and I thinking about our next move, our homes and housing choices have become more rather than less important as a result of Coronavirus. While we still have Brexit to contend with, and the unknown nature of the pandemic continuing into 2021, the demand for quality housing across price brackets and tenures is increasing rather than diminishing.
This year the Oxford English Dictionary chose not to name one word of the year as “the year could not be neatly accommodated in a single word”. Instead, we have become familiar with lockdowns, r-numbers, bubbles, masks, WFH and so on… but my vote for the word most used has been ‘unprecedented’. While this description is true, to an extent, I will leave you with the following thought. One hundred years ago the world was rapt in a global pandemic, global economic challenges, falling Western hegemony, a new wave of unimaginable life changing technology, monopolistic corporations, and the mistrust and challenging of political structures and institutions. This was followed by the Roaring 20s which provided a proliferation of new cultural, economic, political, and commercial ventures. While we have our own challenges in this day and age, we too have opportunities and changing trends which the pandemic has accelerated. It is these opportunities that lie ahead down an often-testing path.